Relative Strength Indicator - What it is and how can it help your trading?
The FP Markets Insight team compiles bite sized strategy insights for our traders. The idea is for you to learn something new and try it in your trading to help refine your skills.
This edition focuses on: ‘Relative strength Indicator – RSI’.
The Relative Strength of price is a method of taking the average gains over “n” periods from the average losses. As trading periods are taken into the calculation the trailing periods are dropped off.
One of the very useful observations of RSI is the “swing BUY” and the “swing SELL” but the set up for this is very specific.
In the left example below the “swing BUY” is observed when the RSI line falls below the 30 line at “A” and moves back over the 30 line and again below at “B” with a higher low. Observation of the price shows the price making a low followed by a “lower low” from this point if the RSI now moves above previous high a “swing point” BUY is in place, often followed by a rally in price.
The right example below shows the “swing SELL” where the RSI makes a “high” and falls below the “70” line followed by a rise back higher. The stock at this point makes a “Higher High” divergence is now in play. When the RSI falls below the previous low a “swing SELL” is provided and often leads to a fall in price. The conditions are very strict, and offer a high probability outcome.
Here’s an example ‘RSI Swing’